Más ventas y beneficios. Mehr Umsatz und Gewinn. Plures venditiones et expletia. Yes, in any language “more sales and profits” are the magic elixirs for a business. However, one of the most overlooked and misunderstood benchmarks for business success is the Lifetime Value (LTV) of a Customer.
In a May 2014 blog article I provided a number of ways to help business owners improve their revenue and profit projections with minimal additional cash outlay. In this article, we will focus on the importance of retaining profitable customers for life.
Who wants customers for life?
The short answer is … every business owner who wants to remain in business for the long haul. The chart below illustrates why retaining 100% of those profitable customers should be a top priority for any growth business.
When you look at the landscape of the majority of businesses, a limited number of key customers often dominate the profits achieved. In a typical business situation 20% of the customers’ can account for as much as 75% – 80% of the profits. This principle is called Pareto’s Law.
What we also know is that it’s 6-7 times more expensive to acquire new customers than retain existing ones and 2/3 of the customers who leave do so because they feel neglected. Customer losses represent an $83B problem to U.S. businesses alone. Conversely, a 5% improvement in customer retention rates could yield a 25% to 50% increase in profits.
So, what is the Lifetime Value (LTV) of a Customer?
The Lifetime Value of a Customer is the Average Purchase Amount x Frequency of Purchase x Average Length of the Customer Relationship.
This next chart below provides an example of the importance of not only retaining, but expanding upon those profitable business relationships with your valued customers.
Lifetime Value of a Customer
As you see depicted in the example, just a 10% improvement in the average purchase amount, frequency of purchases and length of the relationship yields a 34.4% change in the LTV of the customer. Likewise, a 30% improvement in the categories would yield a 141.4% change in the lifetime value of the customer.
Up to this point I have touched on some simple ways to improve your financial outlook and the LTV of a customer. Now, what if you combine all of the 10% Rule elements outlined in the May 13th article. How would this impact the profitability of the business and LTV of a customer over a 15-year period?
This is what I refer to as “The Whole Enchilada”. And as you can see from the chart, the results are truly amazing (ten-fold increase in net profits).
“The Whole Enchilada”
BIG QUESTION: If you knew when you received that initial $100 order from a new customer they would generate almost $15K in revenue over a 15-year period, would you treat them any differently?
Of course. From the example you can see in pure financial terms the value of staying in touch with your customers and continuing to build upon those relationships over time. It also points out the necessity of moving away from a transactional to a relational sales and support model. Customers are people not transactions, and we are all in the human-to-human (H2H) business.
Hope this information was helpful. In the next article I will outline some ways to help you stay in touch with customers, partners and suppliers, and build those critical business relationships for life.
Enjoy the journey!
COPYRIGHT © 2014-21 John Carroll